You’re Hired! (Protecting Your Organization from IRS Issues and Fines)
by Karin M. Smith, MBA, SFO, Consulting Manager
Posted on July 12, 2013
Every year, your organization probably hires many individuals as both employees and contractors to fulfill any number of responsibilities. Your administration is charged with ensuring the contractual agreement is appropriate based on the individual’s key responsibilities and relationship with your agency. Most specifically, governmental entities are under tight scrutiny to determine if the individual is an employee or independent contractor.
The IRS provides guidance on how to evaluate this decision. The employer can be held liable for employment taxes, plus interest and penalties, if a worker is incorrectly classified as an independent contractor. The decision to classify someone as an employee versus an independent contractor hinges on the amount of control and independence the person has.
The IRS has identified three categories to be used in the evaluation:
- Behavior Control – Does the organization control or have the right to control what the worker does and how the worker does his or her job?
- Financial Control – Are the business aspects of the worker’s job controlled by the payer? How the worker is paid, reimbursements, etc.
- Type of Relationship – Are there written contracts or employee type benefits provided? (i.e., pension plan, insurance, vacation pay)
Organizations must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor.
When the IRS decides to look more closely at your records, and yes, they will want to look at your records, they will start by reviewing your 1099 submission. These are questions you should ask yourself prior to the IRS asking you:
- Does your organization have someone being paid through accounts payable versus payroll?
- Were you required to issue a 1099 to an independent contractor and failed to do so?
- Do you have the same social security number on a 1099 vendor as an employee?
Many resources are available from the IRS to assist employers with the determination, including training materials and publications for specific industries. (Available at http://1.usa.gov/XRCSmM) Employers can also request the IRS determination by filing Form SS-8.